The government can't stop the domino effect. At best they can hold some dominos for a while, but they can't do it forever.

In the US, banks weren't failing. Some banks were failing (and some very major). But if they had fallen, not all banks would be gone. In fact, the healthy ones who were healthy because of sound business practices would be doing just fine.

Let the bad ones fall.

Ok then, is there an example of a country/economy which held strictly to the principles or the closest to the principle of 'do nothing and it'll all work out'? Wheres our counter example, because at this point I see a lot of idealism but little evidence and facts.

Ok but what do you say to the people/companies or worst communities, cities, villages ...who had their money into those banks ? Game Over ?

They aren't responsible for that...

What would go faster?  The recovery?  Not hardly.

Like an example already given, in 1921 we had the worst econimic callapse in history and by letting the market fix itself it lasted a year.  Less than a decade later the government suddenly thinks they must be involved which makes that recovery take almost 2 decades and required a war for economic stimulus. 

I stated it earlier that if we had let the makret work itself out that we'd already be in recovery but instead we have talks of another bailout package, more power for the Federal Reserve and now mortgage buyouts.

The precedents for banking crises like this are Sweden's and Japan's.

Japan tried lots of things which failed (stimulus, shifting debt from banks to the government, i.e. the things USA is trying now). They later had better results by letting some banks fail after auditing them and concluding they were insolvent, and nationalizing others.

Sweden forced banks to write down all their losses, and then helped them:

http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html

I think the most important thing is to be realistic. USA's actions towards banks are very naive (assuming 8% unemployment when setting their capital levels, allowing them to hide debt under the carpet, allowing them to continue doing the same things that led to this problem... I have sources for all of these if someone's interested). They're not just naive, but they hurt the taxpayers a lot, shifting debt to the government's balance sheet and paying the banks handsomely for it (as the OP as well as many other articles show).

Obviously some people believe that if you live above your means and spend more than you make, you shouldn't be personally responsible for your mistakes, especially if there are thousands of idiots in the country, then you should make the thousands of responsible people, like myself, cover your ass because you want your pricey BMW with your 2000sqft house and swimming pool. You also work at a 40k year job and can't afford any of it, but hey, we should spend trillions to fix your problems.

Honestly, people should be evicted form their homes, they can always move into apartments, so no big loss there, they still have shelter. Businesses that aren't profitable should go under, as obviously not enough people want to pay a high enough price for their products, and what they are doing is a waste of human resources. Those people would be hired by a new entrepreneur who needed labor with a business idea that would make money, hence helping the economy.

Here is a question for you. The government is buying up all the debt and promising that they will make the money back. Well, if that were the case, how come no private company is buying up the debt and making easy profit? Obviously no one wants to do what the government is doing, and if that is the case, that says that they are wasting their $$$. Let the market fail and someone with money will step in, buy up all the debt, and turn a nice profit while companies turn themselves around thanks to private companies helping them out. Instead we have the government trying to do the same thing, but at the same time they are destroying the dollar and increasing taxes which hurts the companies and employees they are trying to help.

The governments job should be to protect the citizens, not manage the economy. They should provide basic necessities to life that private companies can't provide (stuff like roadways, since a toll system would be insane), and provide protection for their citizens. Obviously the government should step in economic wise to prevent companies from abusing monopolies, but the market should be allowed to do whatever it needs to do, and if someone makes a mistake, the market should fix it (if there is a chance to make money, someone will)

What makes you think with how many billions of dollars large banks have "invested" in campaign contributions, and with how many former financial executives are in powerful positions within the government, that the government would ever put the interests of their citizens ahead of the interests of the banks?

Rather than letting banks fail and for the toxic assets to be discounted to a level where they return to being decent (although high risk) investments, the government will funnel hundreds of billions of dollars indirectly into the underlying asset and therefore increase the value of the toxic assets and "Repair" the banks balance sheets ... Unfortunately, this will come at the expense of the average American's balance sheet as they will be forced to pay higher taxes and will likely face inflation at a rate faster than their income grows.

What they can do is... not give money.. but loan some money, because, in theory, governement are at risk-zero.

Here they loaned some money to the banks and became shareholders. When the economy will be more stable, they will be able to buy back the shares and their independancy.

This way:

1- Confidence is restored,

2- Credits are released

3- Companies can go back to their business and people stop loosing their jobs

If everything works well, the governement might even make a profit out of it.. which will be reinvested in the national economy.

... well that is in theory... ...

Here is why the government isn't letting that happen:

“It is well understood that the four major banks would likely need an additional capital injection should they be forced to mark the second-lien mortgages on their balance sheets to a realistic value,” Greenwich Financial’s Frey said.

http://www.bloomberg.com/apps/news?pid=20601087&sid=apwrXlpuvZo0

In other words... the four major American banks would go bankrupt if they were using honest accounting practices. The banking system is still a bomb waiting to explode.